While analysts were not expecting anything more than a slight increase in speeds for Freddie Mac November prepayment numbers last Thursday night, they were predicting that prepayments for the months ahead will bear out a significant pick-up in refinancings for next year.

At press time, prepayment specialists were still awaiting the FHLMC numbers, which were expected to be faster due to the unique day count in the month of November.

There were 23 business days in the reporting period, which was from October 16 through November 15, compared to a 19.5-day reporting period last month.

This increase in number of days was expected to increase Freddie prepayment speeds by 12% to 15%, according to Art Frank, the director of mortgage-backed research at Nomura Securities.

"But this pick-up in refi's won't be in these Freddie numbers, because [the pick-up] will be based on the rally at the end of November," Frank said. "The pick-up in refi's will start to show in prepayment numbers for the month of January."

This current increase in FHLMC speeds is most likely not caused by rates, however, according to Warren Xia, a prepayment researcher at Banc of America Securities.

"The 30-year mortgage commitment rates dropped 12 basis points from the prior month," Xia noted. "So I'd say the bulk of the [prepayment] pick-up is because of the day count."

Nomura's Frank concurred: "Rates didn't come down very much between August and September," he said. "Prepayment data from mid-October to mid-November were probably locked in in September; rates were just a few points below. So there's not a big kick [in rates]."

While there will be a speed increase across the entire coupon spectrum in the latest data, Frank did not foresee a big pickup in 8% and 8.5% mortgage bonds this month.

However, a refinancing wave may be just around the corner. Last week's current-coupon Fannie Mae showed the lowest close since September 1999, closing 7.27% on the interpolated current-coupon Fannie Mae yield.

"This brings us within 25 basis points of a pretty major refi wave," Frank said. "If we fell to the 7% level on secondary market yields we'll have a pretty big refi wave. We will see some pick-ups in January already in speeds for 8s and 8.5s, but not in the current Freddie Mac report.

"But for a real' refi wave, rates have to come down another 25 basis points," Frank concluded.

FNMA speeds, expected to be released this Wednesday, are not expected to increase as much as Freddie speeds. Fannie uses 21 days for November instead of 23. -

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